The Oracle of Omaha has spoken, and he minces no words in predicting the newspaper industry’s declining fortunes. I hope newspaper owners will take this as yet another sign that they ought to be rapidly beefing up their websites (via BankStocks.com):
If you were looking at newspaper publishers as possible investments, what would you use as a margin of safety?
[Warren Buffett]: What multiple should you [use] for a company that earns $100 million per year whose earnings are falling by 5% per year rather than rising by 5% per year? Newspapers face the prospect of seeing their earnings erode indefinitely. It’s unlikely that at most papers, circulation or ad pages will be larger in five years than they are now. That’s even true in cities that are growing.
But most owners don’t yet see this protracted decline for what it is. The multiples on newspaper stocks are unattractively high. They are not cheap enough to compensate for the companies’ earnings power. Sometimes there’s a perception lag between the actual erosion of a business and how that erosion is seen by investors. Certain newspaper executives are going out and investing on other newspapers. I don’t see it. It’s hard to make money buying a business that’s in permanent decline. If anything, the decline is accelerating. Newspaper readers are heading into the cemetery, while newspaper non-readers are just getting out of college. The old virtuous circle, where big readership draws a lot of ads, which in turn draw more readers, has broken down.
Charlie and I think newspapers are indispensable. I read four a day. He reads five. We couldn’t live without them. But a lot of people can now. This used to be the ultimate bulletproof franchise (get more info here from this article about it). It’s not anymore.
WB: It may be that no one has followed the newspaper business as closely as we have for as long as we have — 50 years or more. It’s been interesting to watch newspaper owners and investors resist seeing what’s going on right in front of them. It used to be you couldn’t make a mistake managing a newspaper. It took no management skill — like TV stations. Your nephew could run one.